Bitcoin's fall from from $37,000 to below $30,000 within 48 hours saw the biggest daily red candle ever.
BTC has pared some losses since, bouncing above $31,500. At these prices, however, BTC/USD is headed for its worst week ever, losing over $5,000 in the past four days, as the bulls attempt to establish $32,000 as new support.
BTC/USD 1-week candle chart (Coinbase). Source: Tradingview
There are three main reasons why the price of Bitcoin dropped so steeply overnight. First, the options market was overheated with growing put options. Second, a critical resistance area was rejected. Third, the speed of the sell-off possibly led to a panic drop in a short period.
Options market saw more puts
In the options market, there are two types of contracts: puts and calls. Puts are sell orders and calls are buy orders.
According to Laevitas, a data analytics platform, the options market has $3.1 billion in notional open interest with near-term put volume rising. They said:
“1 week left until the 29JAN contract expires on Deribit Exchange with over $3.1b in notional open interest. Max pain stands at $28k - the meme becomes reality? Put volume picking up since yesterday especially for near-term options.”
Currently, the options market accounts for around 33% of the futures market’s open interest. With over $3 billion in open interest, the options market can have a significant impact on the price of BTC.
Bitcoin options traded contracts. Source: Laevitas
Critical resistance rejected, what’s next?
The $35,000 level was a critical short-term resistance area. As soon as BTC rejected the level, it quickly fell below $30,000.
Scott Melker, a cryptocurrency analyst, said that Bitcoin swept the lows, even though it dipped below the previous support area. Hence, if the bullish structure remains intact, a rally back to $35,000 is a possibility. He wrote:
“As usual, the wick went a bit deeper than expected, but it's following the plan. Swept the range lows into the box, bullish SFP and movement up. Solid volume on the SFP. I drew this yesterday and shared it live, don't @ me about hindsight. Not out of the woods yet.”
Bitcoin price chart with key levels. Source: TradingView.com, Scott Melker
In the near term, traders will likely be watching the $35,000 level for confirmation of where BTC will be headed next.
As the price of Bitcoin dropped below $33,500, the previous support level, a panic sell-off ensued. In fact, the Crypto Fear and Greed Index plummeted to "fear" for the first time since October after spending months in "extreme fear."
A pseudonymous trader known as “Kaleo” emphasized that the market sentiment in crypto tends to shift quickly. He said:
“If #Bitcoin dips to the low 20Ks, it’ll be just low enough that all of your friends and family who bought the past few weeks will hate you. They’ll never want to touch $BTC again... only to ask if it’s a good time to buy more at $50K or if they should wait for another dip.”
However, one bullish catalyst for Bitcoin in the near term is the continuous accumulation of BTC by Grayscale. On Jan. 19, the fund added a record 16,244 BTC ($607 million) in one day to its holdings or 18 times the amount of new BTC that's mined per day.